At WVFC, we’ve often highlighted the work of Elizabeth Warren, chair of the Congressional Oversight Panel (who’s a Harvard Law professor teaching contract law, bankruptcy and commercial law in her copious free time). Via our friends at the financial watchdog NewDeal 2.0,  today Warren — recently named one of the World’s 100 Most Influential People by TIME Magazine — presents the case for the Consumer Financial Protection Agency (CFPA) now being considered in Congress. The agencies charged with such protection thus far, she explains, have been unwilling or unable to keep up with 21st-century business practices — leaving us all in the lurch; a new, well-funded CFDA can ensure that we’re being treated fairly, as consumers and stockholders, by those with whom we do business.

The Federal Reserve, the Office of the Comptroller of the Currency (OTC) and the Office of Thrift Supervision (OTS) have had the legal authority to protect consumers for decades. The agencies’ well-documented refusal to protect consumers — a refusal that ultimately jeopardized the safety and soundness of financial institutions and brought the economy to its knees — results from two structural flaws in the current system.

  • The first flaw is that financial institutions can choose their own regulators, which causes regulators to under-regulate. By changing from a bank charter to a thrift charter, for example, a financial institution today can change from one regulator to another. In fact, an institution may decide to evade a federal regulator altogether, by housing its operations in the states and forgoing a federal charter. Institutions can shop around for the regulator that provides the most lax oversight, and bank holding companies can shift their business from their regulated subsidiaries to those with no regulation — and no single regulator can stop them. The problem is exacerbated by the funding structure: Regulators’ budgets come in large part from the institutions they regulate. This regulatory arbitrage has triggered a race to the bottom among prudential regulators and has blocked real consumer protection.
  • The second structural flaw is a cultural one: Consumer protection staff at existing agencies is small, the last to be funded, and always playing second fiddle to the primary mission of the agencies. At the Federal Reserve, senior officers and staff focus on monetary policy. At the OCC and OTS, agency heads worry about capital adequacy requirements and safety and soundness. As the current crisis demonstrates, even when they have the legal tools to protect families, existing agencies have shown little interest in effective consumer protection.

President Obama’s proposal to create a new Consumer Financial Protection Agency (CFPA) represents a significant paradigm shift — a shift that will repair a structure that failed us.

First, the CFPA will bring existing federal consumer regulation under one roof. Similar regulations for similar products will apply across the board — whether those financial products are issued by a federally chartered bank, a state chartered thrift or an unlicensed business. Financial institutions will be unable to shop around for the regulators that regulate least. Likewise, regulators will no longer have to choose between relaxing standards or watching haplessly as institutions choose to go outside the regulatory system altogether.

Consolidation will also allow for streamlined, smarter and more consistent regulations — regulations that will reduce cost and burden but increase effectiveness. Instead of passing one law after another, weeding out credit scams and dividing regulation among many agencies, a single agency can slice through the regulatory maze to create one consistent — and well-enforced — set of rules.

The CFPA would create a home in Washington for people who care about whether families are playing on a level field when they buy financial products. Canada created this structure by establishing its own version of a CFPA in 2001, and its policymakers swear by the results. By bringing economic experts who care about consumer financial issues under one roof, CFPA can develop as a smart agency with real expertise.

A smart agency with real expertise will develop safety standards that work for families and that, in turn, will promote stability among institutions and prevent the next crisis. It will focus on one driving question: Are consumer financial products explained in a way that consumers can understand and that allows the market to work?

(Continue “Elizabeth Warren: Why We Need a CFDA” by clicking here.)

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